Colleen Bennett - Sotheby's International Realty

THE REAL DIRTT: Who Cares If You’re Living With Unpermitted Structures; It’s L.A., Baby!

March 31, 2017
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A permitted spa, seen as a home improvement, will increase your property taxes.

The No. 1 sign that you live in Los Angeles isn’t that you’re always 30 minutes late, adore In-n-Out burgers, or wear your Lululemon gear all over town. No, it’s the fact that you, your neighbor and your neighbor’s neighbor likely lives in a home with an unpermitted addition or alteration.

No one knows the exact number of homes lacking the proper building permits, but educated guesses are in the 80 percent to 90 percent range. An unpermitted addition, such as an extra room or bath, or an unreported renovation to a kitchen or garage, dot L.A.’s landscape like taco trucks on Saturday night after the bars close.

Life Lessons of a Harvard Reject

The reason the city has turned most of its citizens into scofflaws (lawbreakers) is pretty clear. People, who already pay high mortgages and property taxes to live here, don’t want to add to their property tax bills, which is exactly what happens when the city gives you the final sign-off on your permitted project. According to the California State Board of Equalization, reassessment of a property is required any time new construction occurs, which is basically anything — outside of normal maintenance or repair — that adds value to the property.

Fix a leaky toilet, that’s a repair. Replace your Crane or American Standard with a throne-like commode worthy of a king, that’s an improvement for which the city or state will want you to pull a permit and add to its revenue stream.

Sounds ridiculous doesn’t it? That’s why, besides avoiding an extra tax bite, most people, seem to skip the visit to city hall to pull permits. It’s a hassle, it costs money to obtain the permit, and can unduly lengthen the time of a home improvement project while you wait around for the inspector to show up and initial your value-adding home construction project.

Furthermore, as a homeowner and the reputed king or queen of your castle, you feel that you should be able to build or modify whatever you want without interference or regulation from the state. It’s a question of personal freedom. Convert a garage, add a deck, enclose a porch? What’s stopping you? It’s your domain, after all. If your jury-rigged or bootlegged heating or electrical system works to your satisfaction, who cares if it’s not quite up to code?

That said, the permitting process and California’s uniform building code have strong justification for their existence. Without regularly enforced building permits and regulations, you risk a daily Oakland Warehouse Fire (Dec. 2, 2016), a structure, not permitted for residential or entertainment uses, that claimed 36 lives.

Multiply the prospect of slipshod construction – careless electrical work, faulty plumbing, use of defective materials, unlicensed contractors etc., across L.A. proper, and our beloved City of Angels becomes a landmine or rat’s nest of substandard “improvements” with the potential to cause great harm or even death.

After the brief introduction above, maybe the best way to determine how you should feel and react to all the unpermitted spaces around you is to look at the situation from both the home buyer and home seller’s perspective. Warning: the two sides will see things quite differently.

As sellers seem to hold all the cards in today’s hot real estate market, let’s look at some of their issues and concerns first.

The Seller’s View

If you recall from your Economics 101 class, sellers like to sell at the highest possible price, a law that makes buyers of foreclosures and house-flippers salivate. The trouble is, many of these same investors, who realize time is money, often skirt (pull permits for the foundation but not for the kitchen) or skip the building permit process altogether and bring in their own crews to complete their flip on time and on budget.

Although they don’t pull all the required permits, these investors-cum-sellers insist everything is up to code. They may even boast that the quality of their work, in some cases, may even be better than contractors who go through the permit process. Nevertheless, the seller must disclose to the prospective buyer all unpermitted improvements. They also can’t include any unpermitted space as part of the house’s overall square footage.

So, a 2,500-square-foot house with a new but unpermitted 10-by-10 foot bedroom would in reality be a 2,400-square-foot house, in the eyes of the county assessor. This might not seem like such a big deal, but if prices in the owner’s neighborhood are running $300 a square foot, that’s a difference of $30,000.

If two houses were identical in every way, except that the one had the unpermitted room and the other did not, you would expect a prospective buyer to offer less for the unpermitted construction, despite protests from the seller of the unpermitted property that his home offered the same quality and craftsmanship throughout.

And with today’s tight inventory and multiple buyers bidding up properties in many hot neighborhoods, the argument of the unpermitted homeowner has literally been holding its value.

Indeed, given the current undersupply of move-in ready houses, prospective buyers are blowing through caution flags and stop signs they would normally observe with unpermitted homes and are making full-price or even over-asking-price offers despite all the remaining questions they may have concerning the property.

So, even though the owner of the unpermitted property cut a few corners to save on taxes, time, permits and hassles, he or she is not being penalized in a hot market. Indeed, they are being rewarded.

Right now, sellers have impunity. Because today’s market favors the sell side, sellers can shift all their risk to buyers – and they have.

The Buyer’s View

Again, sellers typically have two options to sell their unpermitted properties. In the past, if they wanted to get full price, they could bring their unpermitted properties up to code by pulling the proper permits, making the requisite fixes and paying the TIP (back Taxes, Interest and Penalties) or they could simply do nothing by selling their property “as is” and disclosing all the unpermitted spaces and additions associated with the home.

Again, with frustrated buyers acting ever more recklessly after constantly getting outbid by their home-buying competitors, the latter do-nothing, “as-is” strategy adopted by many sellers has proven a winner.

Conversely, the buyer-beware adage has never been so replete with meaning or warning signs.

For one, if a buyer purchases an unpermitted property that must later be brought up to code, per the local building codes, all those fixes now become the responsibility of the buyer. Having discovered the violation, the city is well within its rights to request back taxes and interest from the buyer and assess a penalty.

If the city decides that an addition can’t be brought up to code, then the city can demand that it be torn down. Or worse, the local jurisdiction could red-tag your home, forcing you to find other living accommodations.

Additionally, if your mortgage company discovers illegal additions, and that you were aware of them, the company could “call” your loan, meaning you have to pay the full balance immediately.

Furthermore, additions that violate local zoning ordinances and setback requirements or encroach on your neighbor’s property could give your title insurance company cause not to cover any of these issues, leaving you to rectify the situation on your dime.

Speaking of insurance, if an accident, like a slip-and-fall, occurs within an unpermitted space or as the result of substandard, unprofessional and unpermitted work, the insurance company may not honor the claim. Why would the insurance company pay, if the space where the incident occurred, doesn’t technically exist.

Another concern could arise if you buy a property that currently has a tenant living in an unpermitted space – maybe in that beautifully appointed room above the garage. It could be the nicest unit possible — even nicer than where you sleep — but the unpermitted space may give a tenant grounds to sue you for back rent because, legally speaking, the unit is uninhabitable.

Lastly, you might be willing to overlook many of the above-mentioned risks or concerns because you tell yourself, who is going to know or find out. Out of sight, out of mind is your motto, and over the years, it’s served you fairly well. Besides, who is really going to care whether that beautiful great room you’ve fallen in love with that opens up to a grand pool is permitted or not?

Well, as it often turns out, a neighbor who turns out not to be so neighborly will care (or perhaps somebody you outbid for the home will care) enough to tip off the local building department, all anonymously, of course!

Limited Buyer Leverage

Unpermitted construction in greater Los Angeles is so commonplace that almost every transaction will be forced to deal with it to a greater or, you hope, lesser extent.

For the transaction to go forward, buyers, in particular, should believe that the risks they are accepting will be less than the benefits they receive.

In helping the home shopper reach a yeah-or-nay decision, the more knowledge and intel you can gather always helps. For starters, go to city hall and pull permits to help you compare square footage and the now-and-then footprints of the home you’re considering to buy. Are the square footage and footprints similar or have they drastically changed?

A good buyer’s agent, familiar with the neighborhood you want to buy in, may also be able to help you identify potential problems that your target property and similar homes have encountered.

Inspectors, title reps, appraisers and attorneys may further help you identify unpermitted construction and how much money it would take to bring the subject property up to code or whether it’s even possible.

But just as likely, an inspector, concerned about his or her own liability, will defer by noting that further review and research needs to be conducted to determine if the work was permitted. They may flag the room or addition, but they likely won’t give you the definite yes or no you’re seeking.

Once you’ve gathered your information, you may choose to bid on the property at a substantial discount or you could ask the seller to remedy all the unpermitted construction as a condition of the sale.

In a hot, hyper-inflated market, however, your offer likely won’t go very far, especially if other “as-is” buyers are willing to overlook all the issues you’ve called out.

Ultimately, whether you walk or chase the deal depends on the nature of the problems you’ve identified, along with your resources and risk tolerance.

Maybe in the end, all you need to do to win over the seller — or have them see the house on your terms — is to arrive a half hour late in your Lululemon gear with an offer of an In-n-Out burger to show you are the ultimate L.A. insider who deserves the house.

Whether you’re a seller or a buyer, we want to hear where you stand on the subject of unpermitted construction, especially with regard to taxation, liability, excessive regulation or governmental overreach, safety, flipping, and any personal tribulations you want to share. To buy, bulldoze or walk, that is the question.

If the spa hadn’t been permitted, the homeowner could have saved the time and expense of pulling permits, but the relative risks associated with unpermitted construction may have far exceeded any early rewards. Paying the toll upfront might be far wiser than dealing with unknown and untold liabilities later.

 
 Want more real estate information on everyday real estate issues facing homebuyers and home sellers alike? Look to LaVerneOnline and the AllBusinessJournal, your constant and classy No. 1 source for local news in La Verne and across the San Gabriel Valley.
 
 

 
 
 
 

 

 
 

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